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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

Securities Exchange Act of 1934
Release No. 41929 / September 28, 1999

Accounting and Auditing Enforcement
Release No. 1165 / September 28, 1999

Administrative Proceeding
File No. 3-10040

_________________________
:
In the Matter of : ORDER INSTITUTING PUBLIC
: PROCEEDINGS PURSUANT TO
Stephen J. Pace, : SECTION 21C OF THE
: SECURITIES EXCHANGE ACT OF 1934,
: MAKING FINDINGS, AND
Respondent. : CEASE-AND-DESIST ORDER AND
: ORDER OF DISGORGEMENT
_________________________ :

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Stephen J. Pace ("Pace").

II.

In anticipation of the institution of these administrative proceedings, Pace has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's finding of jurisdiction over him and the subject matter of this proceeding, which Pace admits, Pace consents to the issuance of this Order Instituting Proceedings ("Order") and to the entry of the findings and the imposition of relief set forth below.

III.

FINDINGS

On the basis of this Order and the Offer submitted by Pace, the Commission finds 1 that:

Summary

A. During the period described below, KnowledgeWare, Inc. ("KnowledgeWare"), a company engaged in the business of, among other things, marketing computer software products, and certain of its executive officers and employees engaged in a financial fraud that violated the antifraud, periodic reporting, books and records, and internal controls provisions of the federal securities laws. Specifically, from at least July 1, 1993 through June 30, 1994 ("FY 1994"), KnowledgeWare and certain of its executive officers and employees artificially inflated KnowledgeWare's revenue and net income on its books and records and in its public filings with the Commission by fraudulently recognizing sales revenue in connection with transactions that did not constitute bona fide sales. As a result, KnowledgeWare's books and records were inaccurate and its interim reports on Forms 10-Q for the quarters ended September 30, 1993, December 31, 1993 and March 31, 1994 were materially false and misleading.

The Respondent

B. Pace, currently 38 years of age, was employed during the year ended June 30, 1994 as an Area Vice President at KnowledgeWare.

The Issuer

C. During FY 1994, KnowledgeWare was a Georgia corporation with principal offices located in Atlanta, Georgia. At all times relevant hereto, KnowledgeWare's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act. Knowledgeware common stock was quoted on the NASDAQ National Market System.

Pace's Role In The Financial Fraud

D. KnowledgeWare filed materially false and misleading interim reports on Forms 10-Q with the Commission for the quarters ended September 30, 1993, December 31, 1993 and March 31, 1994. Specifically, KnowledgeWare materially overstated revenue and net income in each of those quarterly reports. In addition, KnowledgeWare falsely reported a profit for both the quarter and the nine months ended March 31, 1994 when, in fact, KnowledgeWare incurred a loss in both periods.

E. The foregoing misstatements resulted in part from conduct in which Pace engaged. Specifically:

1. In negotiating purported sales transactions with resellers of computer software products ("Resellers"), Pace granted, or authorized his subordinates to grant, the resellers the unconditional right to return the purportedly purchased products to KnowledgeWare ("Return Rights") and agreed, or authorized his subordinates to agree, that the resellers were not obligated to pay KnowledgeWare for such products unless and until the resellers had resold those products to others ("Contingent Payment Terms").

2. Pace obtained, or authorized his subordinates to obtain, from such Resellers executed purchase order documents for KnowledgeWare products ("Order Letters") that omitted the Return Rights and Contingent Payment Terms that KnowledgeWare had granted to the Resellers. Instead, the Order Letters set forth an unconditional commitment to pay KnowledgeWare for the ordered products. Pace sent, or authorized his subordinates to send, the Order Letters to KnowledgeWare's order administration department, where they were used to initiate the recognition of sales revenue on KnowledgeWare's books and records.

3. Pace prepared and signed, or authorized his subordinates to prepare and sign, separate letters to such Resellers memorializing the Return Rights and Contingent Payment Terms that had been granted to the Resellers ("Side Letters"), but neither Pace nor his subordinates sent or otherwise disclosed the terms of the Side Letters to KnowledgeWare's order administration personnel.

4. Pace prepared, or authorized his subordinates to prepare, and signed Transaction Approval Forms ("TAFs") with respect to certain purported sales transactions with Resellers, but nowhere in such TAFs did Pace or his subordinates disclose the existence of the Side Letters or the Return Rights and Contingent Payment Terms.2 In certain other instances, neither Pace nor anyone else prepared the requisite TAFs with respect to purported sales transactions with Resellers to whom KnowledgeWare had granted Return Rights and Contingent Payment Terms.

F. Pace never disclosed the Side Letters, Return Rights or Contingent Payment Terms to KnowledgeWare's order administration personnel or to KnowledgeWare's accounting personnel. KnowledgeWare recognized revenue on these purported sales transactions, although the existence of the Return Rights and Contingent Payment Terms made KnowledgeWare's recognition of revenue on such transactions improper.

G. The Resellers to whom KnowledgeWare granted Return Rights and Contingent Payment Terms in Side Letters executed or authorized by Pace never paid KnowledgeWare for the products which, according to the Order Letters and TAFs, the Resellers purportedly had purchased from KnowledgeWare.

H. During July and August of 1994, KnowledgeWare reversed a total of approximately $20 million in sales revenue that had been improperly recorded in FY 1994, including revenue that had been recorded on the purported sales transactions described in paragraphs III.E through III.G.

Pace's Violations And Unjust Enrichment

I. By reason of the conduct and events set forth above, Pace violated, and was a cause of violations of, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1.

J. As a result of the conduct described in paragraphs III.E through III.F, Pace improperly received excess incentive compensation for FY 1994 in the amount of $6,728.

IV.

CEASE-AND-DESIST ORDER AND ORDER OF DISGORGEMENT

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C(a) of the Exchange Act, that Pace cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1; and

IT IS HEREBY FURTHER ORDERED, pursuant to Section 21C(e) of the Exchange Act, that Pace shall, within sixty (60) days of the date of this Order, disgorge to the United States Treasury a total of $9,944, representing the sum of the $6,728 in excess incentive compensation that Pace improperly received as a result of the conduct described above plus prejudgment interest thereon of $3,216. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order payable to the Securities and Exchange Commission; and (B) hand-delivered or sent by certified mail (return receipt requested) to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (C) submitted under cover letter that identifies Pace as the Respondent in these proceedings, the file number of these proceedings and the Commission's investigation number (NY-6231), a copy of which cover letter and the money order or check shall be sent to Carmen J. Lawrence, Esq., Regional Director, U.S. Securities and Exchange Commission, Northeast Regional Office, 7 World Trade Center, New York, NY 10048, Attn: George N. Stepaniuk, Esq.

By the Commission.

Jonathan G. Katz
Secretary


FOOTNOTES

-[1]- The findings herein are made pursuant to Pace's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

-[2]- Before entering into transactions with terms that differed from KnowledgeWare's standard terms of sale, KnowledgeWare sales personnel were required to obtain approval for such transactions by filling out and submitting TAFs. KnowledgeWare required that TAFs include all proposed deviations from KnowledgeWare's standard terms of sale and were required to be sent to KnowledgeWare's order administration personnel along with the Order Letters and all other relevant sales documents.

http://www.sec.gov/litigation/admin/34-41929.htm


Modified:09/28/1999